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No Pain, No Gain

Oct 21, 2013 | Market & The Economy | 0 comments

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On my way to the FPA Conference in Florida I dropped off in Cork City Ireland for a night to catch up with my family. It also coincided with the 7th budget in 6 years that the Irish have had to endure since the financial crisis of 2008. Unlike their Greek, Spanish and Portuguese counterparts the Irish have put their hands up and admitted that they behaved very badly. They all believed in the bubble they all created together. Of course , it came down, along with the government and the policies that got them into the mess the in the first place.
When Lehman brothers went then so too did the Irish Banks. The Germans who lent all the money to the Irish banks then said the Irish must take the pain and not the “bondholder” (ie.. German depositors). Remarkably the Irish have held their social cohesion and after taking a bailout of 65 billion Euros from the EU and the IMF they believe that in 12 months from now they will be the first country in Europe to exit the bailout.
This is a significant moment for Europe and investors around the world. It will mean that one of the few countries that bit the bullet and put massive structural changes in place and severe cutbacks (28bn Euros in tax revenues so far). It is a significant moment for policy makers in Europe but also worldwide. The school that says more stimulus will be proved wrong.
The critical moment for this in when the Irish enter the international bond market which they have effectively been locked out of since early 2010. They have been considered Junk bonds since then and the interest rates they would be charged to borrow money would have been prohibitive. It is critical that the bond issues go well. The US investors are ready to buy and I believe that the German institutions will also buy the bonds to support a country that has taken the medicine they told them to take. The rating agencies have not been a positive as the politicians or bureaucrats in Europe.
Not without reason. The economy is very vulnerable to whatever happens in the UK, US or Europe. Any wobbles here will push them back into recession. The current growth rate is 0.2% and they are projecting this to rise to 1,8% this time next year. The government debt stands at 123% of GDP, so significant economic growth is needed to get this down. Housing prices have started to go back up slightly, the building trade is starting to tick up slightly, but off an incredibly low base.
The odds are not good, but then they never have been for Ireland, but somehow this resilient nation has been to the mountain top of capitalism and has seen the other side. They know it can do it again, this time slowly and properly.
If they manage to this it will have important knock on effect to South Africa. Europe is our biggest trading partner and it will be a trading zone rebuilding it confidence and markets will rise as a result.
Come on Ireland!



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